Euro zone double dips back into recession

WilliamL. Watts

FRANKFURT (MarketWatch) — Europe’s long-running debt crisis dragged the 17-nation euro zone back into recession in the third quarter, data showed Thursday, offering a negative counterpoint to growing optimism among U.S. and global investors over prospects for the global economy.

Third-quarter euro-zone gross domestic product shrank 0.1% compared to the second quarter, the European Union statistics agency Eurostat said. That’s equal to an annualized contraction of around 0.4%.

Reuters

Policemen stand in a line as picketers and protesters march along Gran Via street during a 24-hour nationwide general strike in central Madrid on Wednesday.

That follows a 0.2% quarterly contraction in the previous three months. A recession is widely defined as two consecutive quarters of shrinking GDP.

The figures “didn’t tell us anything we didn’t already know. However, they did confirm that things are as bad as we thought. And when sentiment in the markets is already at such lows, it doesn’t take much of a push to send stocks lower,” said Craig Erlam, market analyst at Alpari U.K. in London.

The euro
EURUSD, +0.07%
traded at $1.2755 versus the dollar in recent action, up from around $1.2739 in North American trade late Wednesday.

The overall contraction was modest, but confirmed fears the region had been sliding back toward contraction over the course of the year, economists said. The bigger concern is that the downturn will only intensify from here.

The data will put added pressure on euro-zone politicians to ease up on calls for added austerity measures across the region’s so-called periphery, while likely spurring the European Central Bank to provide another dose of monetary stimulus, economists said.

“Today’s GDP figures clearly demonstrate that the euro-zone economy as a whole is in desperate need of macroeconomic stimulus,” said Martin van Vliet, economist at ING Bank in Amsterdam.

“With policy makers seemingly reluctant to engineer a coordinated pullback from fiscal austerity, more monetary stimulus and a weaker currency is likely to be needed to put [the] euro zone back on a path of sustained growth,” he said.

Howard Archer, chief European economist at IHS Global Insight in London, said the GDP data and subdued inflation figures will likely lead the European Central Bank to cut its key lending rate from 0.75% to 0.5% “sooner rather than later,” with a move next month seen as “very possible.”

Still, economists noted that the picture painted by the GDP release could have been worse.

On a national basis, German growth slowed less than expected to 0.2% from an 0.3% second-quarter pace. France surprised economists, rebounding with 0.2% growth after a 0.1% contraction in the previous quarter.

Italy remained mired in recession, but the pace of the contraction slowed to 0.2% after shrinking 0.7% in the second quarter. Likewise, Spain contracted 0.3% after shrinking 0.4% the previous quarter.

“It is encouraging that some peripheral countries like Spain only experienced a mild contraction. We have been surprised by the strength of Spanish and Portuguese exports. It seems that the efforts to boost competitiveness are bearing fruit which is very positive,” said Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast.

The data, however, showed ill winds still spread from the periphery toward the core. Austrian GDP shrank 0.1% after expanding by the same amount in the second quarter. The Netherlands, in particular, felt the pain, shrinking 1.1% after eking out growth of 0.1% in the previous two quarters.

And early survey data for the fourth quarter and hard data from the tail end of the third quarter have only fueled expectations that the downturn will deepen in the current quarter, Diron noted.

Core Germany and France are expected to increasingly feel the pain as well.

Asia driving gold demand

“Certainly the early indications on Q4 activity suggest that the recession is likely to continue through to at least year-end, and whereas the likes of Germany and France provided a partial offset to peripheral weakness in Q3, they too look set to suffer a fall in output in the final quarter of the year,” said James Ashley, economist at RBC Capital Markets in London.

Still, it isn’t clear Europe’s increasing economic woes will cause substantial heartburn for U.S. investors, who appear more sanguine on domestic economic prospects provided politicians can avert the so-called fiscal cliff — a combination of tax hikes and spending cuts that economists say could push the U.S. economy back into recession in 2013.

Meanwhile, retail-sales, production and exports data indicate China’s slowdown has come to an end, noted Heino Ruland, strategist at Ruland Research in Eppstein, Germany.

The U.S. and China “have historically been the world’s source of growth and a turnaround will be good news for those countries ... which do represent the bulk of the NAFTA and BRIC countries,” he said.

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